It seems like Bob Nardelli is always working hard to prove something.
In school he worked to win all the awards and hold all the positions. He was a Boy Scout and a class officer. He was the yearbook editor, an altar boy, and an ROTC cadet. He played guard on his college football team and became co-captain even though he only weighed 195 pounds.
After college Nardelli went to work for General Electric (GE), where his father had worked, as a bottom-rung manufacturing engineer. He worked hard to prove himself. He wanted to run the company some day.
By 1988 he was a VP of manufacturing and he wanted a general management job. That was an important step on the way to his goal: becoming the Chief Executive Officer (CEO) of GE. Jack Welch, who was CEO of GE then, didn't think Nardelli was ready.
So Nardelli quit and went to work for Case Equipment company running a division of theirs. By 1991 he was back at GE, this time running the appliance business in Canada.
He kept working. There were long hours and a constant quest to improve. That's his creed. "There is an infinite capacity to improve upon everything you do," Nardelli says. The idea was that if you kept improving and bringing in the results the company asked for, one day they'd ask you to be the boss. He looked like he was on his way.
Within a year he got the CEO job at GE Transportation. Then he moved on to GE Power Systems in 1995. He was on the short list of folks who were candidates to replace Jack Welch when the legendary CEO retired.
He got the word on who'd be the next CEO at the Albany airport in November 2000. Welch told Nardelli that the job was going to Jeff Immelt. Nardelli wanted to know why. He kept at Welch. Jack's final answer, "I had to go with my gut."
That's not the kind of reason that sits well with Nardelli. He's a self-confessed numbers guy. He loves data and details and things that are logical. As his wife Sue puts it, "Bob is really good at dealing with X-Y-Z situations." That doesn't include gut feelings.
He wasn't given much time to fret though. Just minutes after the official announcement of who GE's new CEO would be, Nardelli got a call from Ken Langone. Langone is on the board of GE, where he came to know Nardelli. He's also on the board of Home Depot. And he was calling to offer Nardelli the CEO job there. It would be a great place to prove to Jack Welch and everybody else that Nardelli really should have been CEO at GE.
Home Depot was founded in 1978 by Bernie Marcus and Arthur Blank. They conceived of Home Depot as a builder's supply store that was open to the public. They got started with capital provided by an investment banker named Ken Langone.
Their idea looked good right from the start. The company went public in 1981 and was listed on the New York Stock Exchange just three years later. By then they had 31 stores and were doing $431 million in sales.
Marcus and Blank made a good team. Marcus was the CEO, a charismatic visionary that everyone seemed to like. Blank was an accountant and a good second in command. Between 1986 and 1996 they led Home Depot to forty quarters of consecutive record financial results. By the time Marcus stepped down as CEO, Home Depot had over 500 stores and almost $20 billion in sales. During its first twenty years Home Depot had grown faster than any other retail chain, including Wal-Mart.
Arthur Blank was elevated to the position of CEO. Some of the same reserve that had made him a great partner for the outgoing Marcus made him a disaster with the Home Depot board. When they identified problems in the company, Blank denied them. When they called him, he often took his time getting back to them.
By the middle of 2000 the board was ready for a change. They felt that there were big problems at Home Depot, despite being named Most Admired Specialty Retailer for nine years running. Besides the signage there wasn't much central control. The stores all pretty much ran their own way. Inventory was huge. There were multiple levels of management and behind-the-times information technology.
They were also worried about competition. Lowe's, the number two chain in the Do-It-Yourself industry was making gains and seemed to be doing a better job with families looking for help with home decorating projects. Contractors didn't seem happy with the treatment they got at Home Depot either.
The board moved quickly to get Nardelli, offering one of those compensation packages that looked sensible to many folks back in the dot-com boom, but which look less and less sensible as time goes on. Nardelli's package guaranteed him a minimum of $6.5 million a year with lots of upside potential. In 2001 he made 24 million dollars.
Once they had Nardelli signed the board called an emergency meeting and lifted the CEO title from Blank. The stock price was $39.
Nardelli started off with a bang. He announced that he was going to double sales and more than double profits by 2005. The skeptical voices were quiet. No one seemed to notice that Nardelli had no retail experience. In fact he was the first executive without retail experience ever to take over a publicly traded, non-food retail chain.
He was also following a founder. That's a notoriously difficult role, especially when the founder everyone is thinking of is a warm, lovable, people person like Bernie Marcus. No one seemed to notice that either.
To make his numbers Nardelli was going to cut labor and inventory costs, centralize management, and enter new markets. No one seemed to be asking whether making all these changes all at once to a company that had been successful was a good idea.
In the beginning things looked good. This was what we usually call the "Honeymoon Period."
By May the stock was trading at $53. New systems were being introduced for just about everything. Purchasing and many merchandising decisions were centralized. Full time employment was cut back drastically. The numbers looked good. But there were signs that all was not well.
By June of 2001, 29 of what had been 34 senior Home Depot executives were gone. In their place were some promotions from inside and lots of folks from outside.
Bob DeRodes came from Delta Airlines to run IT. Jim Stoddart was already at Home Depot when Nardelli arrived. He'd come from GE three months before. Dennis Donovan was hired as Human Resources VP with a pay package of $21.5 million. He'd worked with Nardelli at GE.
It seemed like Nardelli had "management attention deficit disorder." Changes were made, modified and unmade. More changes were made on other fronts. By June 2002 the stock price had fallen to $40 per share.
Nardelli has said that 2002 was the year of the Store Productivity Initiative and centralization, efforts that he characterizes as "The two most pervasive changes in our history." Maybe, but a glance at Home Depot's activities for the year tells a different story.
In February Home Depot launched the first location of a new store format called Home Depot Supply aimed at serving contractors exclusively. In April the first "urban-format" store opened in Brooklyn, New York. These stores will carry the standard Home Depot logo and color scheme. In the meantime the Villager's Hardware stores that Home Depot had opened to catch the home decorator market would start flying the standard Home Depot colors and logo.
A strategy of targeting the contractor or "pro" market and the home decorator/renovator market separately makes sense because those markets have different needs and wants. Contractors are shopping for convenience goods. They want sophisticated help, flexible credit and billing, and relationships with the folks on the order desk. They want to minimize time in the store.
Homeowners have very different needs. They want advice, lots of good advice. And they want it even if it's an hour before closing time on Saturday night. The key to that advice is the quality of staff on the sales floor. This is a very advice-intensive market.
The move toward target marketing may have made sense by itself. But there were lots of other changes.
Home Depot Landscape Supply store prototypes opened in Texas. Nardelli announced the intention of selling to corporations. Just weeks after reminding everyone at Home Depot that the policy was not to sell to any governmental agency or entity, things were reversed. Now government sales were OK. Stores were opened outside the US. Nardelli announced that Home Depot would work on increasing its service business. Then there were all the changes to internal systems and policies. Whew!
Step back for a minute and look at this pattern. It's a lot like trying to re-create the GE structure of lots of different, specialty businesses operating under the same logo. And it may not solve the problem at Home Depot.
The problem may be deeper than a need for good management. The problem may be that Home Depot's basic business model, "a builder's warehouse that's open to the public," isn't viable in a mature marketplace.
In the beginning, the hybrid model worked because it was unique. Contractors would put up with a bit of hassle for the ease of picking up an item or two from a convenient location. Home owners would put up with a warehouse atmosphere to get good pricing and access to more things than the local hardware store could stock.
But now Home Depot isn't alone anymore. To begin with there are lots of their own stores out there, often close enough to compete with each other. There's other home center competition. Contractor's supply stores and independent hardware stores have gotten more sophisticated. A whole company made up of stores that aren't particularly good at serving any one market may not be able to make it.
That may be what's behind Nardelli's strategy of opening specialty stores. But it may be too late. On Friday, February 14, Home Depot stock closed around $21.
This may be a situation where Bob Nardelli can do everything right and still have things go bad. He's got a great financial package so his bank account won't suffer. In fact some analysts think that with Home Depot's stock price in the dumps, Nardelli would do better financially if he got fired.
That might be all right for the pocketbook, but it wouldn't be good for Nardelli's soul. He'd almost certainly have to find another company to run, to try to prove that he really should have been the CEO at GE.
